Okay, let's get started. I'm really happy to have with us again, Kathy Warden, Chairman and CEO of Northrop Grumman. Kathy, you may have a few words to start out with here.
I do. Thanks, Doug. Thanks for having us again. I just wanna start with a reminder that I may make forward-looking statements in my comments today, and those statements include risks and uncertainties, which you can find detailed in our SEC filings on our investor relations website. I also thought I'd just spend a few minutes making some opening comments to provide context on the company before I hand it over to Doug for Q&A. For those of you who don't track the company closely, in our first quarter results, we did show that we're off to a strong start for the year once again. We had revenue sales increase 9%, our earnings up 10%, free cash flow up 15% for the quarter.
We reaffirmed our company guidance, which is growth in the 4%-5% free cash flow growth in the midpoint, about 17%. So really strong business growth that is fueling earnings enhancements as free cash flow delivery. we've been putting that capital to work. Many of you know that we have been investing in our company over the last several years to support the growth that I just outlined, and we continue to do that this year. But we also have a robust strategy for returning capital to shareholders. We recently increased our dividend another 10%. This has been a consecutive trend for us for many years now, and we also have identified over $2 billion in share repurchases planned for this year.
There are two programs that I am certain Doug is gonna ask about, the B-21 and Sentinel, which we're proud to be executing two legs of the nation's strategic deterrent. But we also have thousands of other programs in the portfolio that are contributing to the strong organic growth within the organization, and it's really the diversity and breadth of that portfolio, from space, to armaments, to integrated air and missile defense, and mission systems, and microelectronics in general, that are positioning the company not only for the growth we're experiencing today, but sustained growth into the future. So I'm looking forward to sharing some of the details on that and more, so I'll turn it over to you. You always have great questions.
Okay, thanks, Kathy. You know, just to start off with, maybe, if you look back over the last year, when we were sitting here, you know, what's changed? What, what is different for Northrop Grumman today in terms of either opportunities or challenges?
Well, there's a lot that's stayed the same, and it's important to start there. There is a strong global demand signal for Northrop Grumman products and services, and that hasn't changed. What, though, when you unpack that demand signal has changed, is stronger international growth prospects, particularly coming out of Europe. And we now see that to be a sustained long-term strength in demand signal for our products and services. The other thing that's changed, not just in the last 12 months, but certainly over the last 36 months, is that our company has more products to serve that market. We have transitioned our unmanned systems such that we now have exportable offerings in product lines like Triton.
We have grown our integrated air and missile defense portfolio to have product lines that we can export to foreign nations, and I talked about this on our first quarter call with our IBCS product line. We have, through the addition of Orbital ATK to our company, filled out our tactical missiles and armaments capabilities. And so today, our company has significantly more product that we can export to fulfill these global demand signals. The other thing that has changed in the last year is that we are starting to see the macroeconomic pressures that were putting a damper on our growth subside. That includes the challenges with our supply chain, being able to deliver on time.
That includes the tight labor market that we were all experiencing in the late 2022 into early 2023 timeframe, which now we are able to meet our hiring goals, fully staff our programs. And so that, too, has unleashed a bit of ability to fulfill that demand and grow the business that we didn't have as we were sitting here a year ago.
Well, along that line, now, in terms of macro pressures, I mean, one of the issues that the industry is facing is a defense budget that's under congressional caps.
Mm-hmm.
You know, the new President's budget is actually negative growth in real terms. When you look at that from a Northrop Grumman standpoint, how does this budget situation look?
Mm-hmm. No surprises in this budget environment. The caps were put in place. We knew that they would have the impact that they indeed are having in the top line. But of course, we also saw the Congress pass a supplemental for this year, and we will see if that continues as we look into the future. So from a top-line perspective, no doubt, there's more pressure under the Fiscal Responsibility Act and the caps that have been put in place today than we had a year ago. But also some strong demand signals for U.S. modernization and dealing with the increasing costs associated with defense programs due to inflation, and the need to continue with the efforts that are underway.
I think this next year to two years will be very telling, but we're not at all limited by the budget that we saw from the President this year. As Congress is deliberating on that budget, we're encouraged in what we're seeing, that there will be continued bipartisan support for defense spending at the President's budget level, if not higher.
... Yeah, and on that, when in your conversations on the Hill, do you see any progress in getting, I would call it, a less dysfunctional situation in terms of getting budgets through?
You know, an election year is always a challenge for bipartisanship, but I would say the area that we have seen that coming together is around national security priorities. It's not always the process we'd like on the timeline we'd like, but each year, we have gotten defense appropriations passed in a way that supports what the administration has requested to continue with both the modernization and equipping of our forces. And I meet with many members of Congress. They're good people with the right intentions to support our military and ensure that the men and women who commit themselves to our work around the globe are given the best capabilities to enable them to do that work, and I don't see that changing.
Now, recently, you made some changes. There are changes in the leadership, and you moved Sentinel out of space.
Mm-hmm.
Can you talk about those changes and what you're looking for there?
Yes. Well, first, I wanna acknowledge that the changes we made were precipitated by two of our leaders announcing their intention to retire within the next year. The first is our Chief Financial Officer, Dave Keffer, who is here with me today, and I wanna publicly thank him for the five years that he has spent as our CFO. He has been a tremendous resource to me, the leadership team, and an advocate for our company, and he'll continue to do so as he moves into the next chapter of his life. We also had a leader from our Mission Systems business, Mark Caylor, who's been with the company for many, many years, and he too is moving into the retirement phase of his life. And as he did that, we are taking our Defense Systems leader, Roshan Roeder, and putting her in charge of Mission Systems.
She spent most of her career in that business, knows it very well, and will be able to step into leadership and have us not skip a beat. At that time, we moved Ben Davies, who is leading our Sentinel program and our strategic missiles portfolio generally, into lead Defense Systems and are bringing with him that strategic missiles portfolio. It's really important from my perspective that we have continuity on Sentinel. Ben has established fantastic customer relations and trust as we navigate that program, and his continuity and leadership will be key. It also gave us the opportunity to bring together strategic missiles and tactical missiles into our Defense Systems portfolio and harvest some of the synergies that we anticipate those businesses will have by operating together.
So it seems like a lot of movement, but really makes sense in terms of getting the right leaders into the right place, and I'm most pleased that our succession plan within the company, which we have invested a lot of time and effort into, is working. That we had great internal candidates ready to assume these leadership roles as we have leaders ready to move on to their next phase. So, really, I think in from an investor standpoint, you'll see that the company will continue to operate very consistently and strongly with these new leaders in place, and we have two outgoing leaders who are committed to successful, and in Dave's case, lengthy transitions to make sure that happens.
Now, I wanna jump to the B-21. So you took significant charge for these first five LRIPs. Now, can you talk about the current status of this program and how we can get comfortable that there's not gonna be a next charge, in a sense?
Well, that is something we focus on each and every day, making sure that there isn't the next charge, and not just because we're looking to avoid any further financial impact on the program, but because that would be a reflection of us not executing the program to our plan, and we are committed to executing the program to our plan. We have stepped back and very thoughtfully reviewed what it will take to deliver this program through the fixed-price options that we have, and that is indeed what got incorporated into our financial accounting for the program and the charge that resulted. We monitor that program as we do all of our programs, but that one, in particular, gets even more of my attention and the leadership team's attention to make sure we are progressing in line with the assumptions we made for executing the program.
We are, each and every day, retiring risk on that program as we continue to execute successfully, both on completing the test program or the development effort, as well as, as we now have started production. We are absolutely laser-focused on managing each and every element of execution to avoid future charges, but there are risks associated with any program execution, and that is true on this one as well.
Well, can you comment on how if I put the inflation issue aside, and as you head through these LRIPs, which I assume will each one will be larger in terms of aircraft deliveries. If I put inflation aside, how are you doing on, in terms of performance and schedule and, and cost, ex inflation?
Mm-hmm. Well, as we showed in our first quarter, we are in line with the assumptions that we made on the program, so we are executing to the plan I just outlined. And that includes not only Northrop Grumman, but our suppliers in the supply chain, all of which we are embedded with and managing, the incremental milestones that lead ultimately to that multi-year projection that we have for the program and all five lots that are priced options. Those will get executed through the decade, but these first months, quarters, and years are very telling as we continue to execute those well. It gives me greater confidence that that'll continue to be the case as we progress into the later lots.
Well, if I look at Aeronautics as a whole, so B-21, clearly growth, but it has this pressure from a margin standpoint. Then you've got some programs, declining programs, F/A-18, B-2, Global Hawk, but then you've got some other interesting international opportunities, Triton, E-2D. When you put all of those together, how should we think of Aeronautics in terms of a top-line growth rate at this point?
Mm-hmm. So Aeronautics is growing, and we had predicted that. It actually returned to growth a year earlier than we thought it would, and that was not only on the strength of B-21, but as you note, the many other programs that make up the Aeronautics portfolio, from mature production programs like F-35 and E-2, to programs like Triton, which was transitioning from its development phase into production, which not only supports growth prospects, but margin tailwinds as well, as the margin rate improves in that business. So there are many moving parts below the surface at Aeronautics, but what we've said at the segment level is we expect that business to be able to contribute to our growth, similar to what we're seeing and projecting at the company level.
We see margin tailwinds in parts of the business that offset the headwinds that we have discussed with having B-21, LRIP production, booking at that 0%. I'll remind you, other parts of B-21 are profitable, and all of that mixed together creates the conditions which you're seeing in Aeronautics, which is a healthy margin rate. Mid-nines% is what we've guided for this year, and being able to sustain that with the portfolio that we have.
So you're, you're saying over the next few years, mid-nines, even with that pressure from the B-21 LRIP portion?
We haven't guided beyond this year, but we've talked pretty openly about our expectations that the mix in that business supports margin rates in this, staying fairly consistent with what we're seeing.
Now, F-35, we just had previous session, Lockheed Martin, but, just wanted to get a sense from you. You know, you've been, as I understand it, continuing to deliver to support that 156 per year production rate. When you look at some of the issues around Tech Refresh 3, perhaps delays on Block 4, is there any point where this can affect you in terms of, of delivery rates?
At this point, we have not had any indication that it will impact our delivery rates. For Aeronautics, we have over 450 aircraft on contract, and the guidance that we continue to get from Lockheed Martin is to continue to deliver at our capacity, which is what we continue to do.
Okay. And then in terms of modifications and sustainment work, how does that play into Northrop Grumman on F-35?
So we are involved in the modernization program out of our mission systems segment, and we also are involved in supporting the sustainment of the aircraft. We have an agreement with Lockheed Martin for a portion of that sustainment work share, and we've collectively, as a program, seen that continue to grow and expect that will continue as more aircraft get fielded. The overall mix for us as a company, the production, the modernization, and the sustainment, still put F-35 at about 10% of our annual company sales. A very important program to us in all dimensions and across three of our operating segments.
Now, in Aeronautics, so Triton has become. It seems very interesting at this point. You've obviously had the long contract with Australia, there's NATO now. Can you talk about Triton, where that stands and where what the growth opportunities could be?
Yes. So as you note, we've had the U.S. Navy program of record. We also have sold the aircraft to Australia, and will be delivering aircraft to them later this year. And now NATO, we have 5 aircraft that we are looking to deliver for their surveillance requirements in Europe. And we have multiple other countries who have expressed interest in the aircraft and are in the selection process. So this is exciting for us because as the program has progressed in its maturity and moved into production and has gotten fielded and shown what it is capable of, we are seeing more countries interested in fulfilling their requirements with this ready in production aircraft that they can field very quickly.
Can you, I'm gonna jump over to the other big program, Sentinel. You know, Sentinel, I think as we all know, had an, now has the cost estimates are substantially higher. It had a McCurdy breach. That has, as I understand, nothing to do with you. But, but can you talk about where Sentinel is? How that program's progressing, and specifically, how it's progressing for Northrop Grumman in terms of revenues and earnings?
Well, you know, let me first say, it has everything to do with our execution on the program to be able to help the Air Force find ways to deliver this capability for the taxpayer in an appropriate and affordable way. So we are in partnership with the Department of Defense to deliver this capability. Yes, the program has, like every program and everyone, experienced the impacts of inflation. When the program was cost estimated last four years ago, it was before the start of the pandemic, and we all know what has happened to materials, particularly construction costs, during that timeframe. And so those cost increases are now being reflected in the latest government cost estimates associated with the program and need to be understood, dealt with, and rationalized. But as the prime on the program, we take ownership to work with the government to help that happen.
As we are working through that process, and the government will work through a process here in the next six weeks or so to determine whether they recertify the program and any changes they wanna make to it going forward, we will then rebaseline associated with these changes. The program is core to national security. It's been supported through many reviews by each new administration who comes in and does a Nuclear Posture Review, that we need a Triad, and that is the current policy of the land. So I do anticipate that the program would be recertified, and then we will go into the process of incorporating any changes into the baseline and press forward.
At the same time, this review is going on, however, we are also heads down, executing the development portion of the program, because largely, these impacts are related to the deployment phase of the program when we get out into the missile fields and are doing the work on the silos, which doesn't happen until-
That's post-2030, right?
That is, post-2030 at this point.
Yeah.
We'll do some early implementation as part of the development program, but the production, as you would think about it in this program, we call it more deployment, happens in the 2030s. And so most of what I've just characterized is in impacting that timeframe, not the work that we're doing today, and I think that's where your comment came from, that we are not distracted by the review of what's going to happen later in the program. We are executing on the program as it exists today.
But what it does do, I would think. I mean, it, the delay in deployment stretches out... In other words, there might have been some more growth, and it's a cost-plus development contract, but there might have been some more interim growth pre-2030, before than there is now.
Mm-hmm.
that, that's stretched out. Is that right?
Well, the program is likely to end up larger.
Yeah.
A larger program stretched out over a couple more years, the profile probably doesn't look very different.
Mm-hmm.
because the overall program is bigger as well. It's not the same size program stretched out over two more years.
Yeah. Got it.
It's a bigger program. Right.
Yeah. And then, I wanna jump around a little bit here.
Mm-hmm.
If we go back to where we were on the budget before, with the supplemental passage-
Mm-hmm.
- How does that benefit you? How do you see Northrop Grumman winning in that?
Well, I've talked about a couple of areas already. And certainly, as the U.S. and our allies look to replenish stockpiles of weapons, we are part of that supply chain and also a prime deliverer of some of those capabilities, some of which are funded in the supplemental. We also received direct funding in the supplemental to add some surge capacity for solid rocket motors, which has been a bottleneck in the supply for tactical missiles, in particular, and so we'll be off executing that to further increase capacity above what Northrop Grumman invested to get to 3x our capacity, and I shared this in our first quarter earnings call.
That work is largely complete and is fueling what you've heard from some other companies about their ability to deliver more growth because the supply chain bottlenecks are starting to be alleviated in that space, and we're proud of our investment and contribution to make that happen. But on top of that, the government has authorized some funding to us to go create even more surge capacity. We also have some of the shipbuilding industrial base, the submarine industrial base funding coming to us to support the scale-up that we are doing in support of those programs as well. So a pretty broad and comprehensive set of opportunities that we are getting funding through the Supplemental, either directly or through prime.
Now, one of the programs that you've talked about and that has clearly increasing demand in Europe is IBCS.
Mm-hmm.
You made a comment that that could be on the order of $10 billion-
Mm.
- for IBCS.
Mm-hmm.
Can you help us understand that a little better, and where the demand is, and how that might ramp?
Mm-hmm. So the demand is worldwide. It's country allies that are looking to improve their integrated air and missile defense capabilities, which is just about all of our allies, right now, but particularly in Europe, is where we've seen the demand increase substantially just in these last 24 months. And when I talked about the franchise of IBCS being approximately $10 billion, it includes the countries that have expressed interest in, or in the sales pipeline today, which is 7 countries, in addition to where we are already fielding the capability, which is the U.S. and Poland.
One thing that struck me is just more broadly, Northrop Grumman. If I go back five years ago or so, international was a pretty small part.
Mm-hmm.
I mean, you could participate in F-35s, things like that.
Right.
Where do you see international going? I mean, it seems like there's a larger range of opportunities here.
Mm-hmm. Yeah. I would say for Northrop Grumman, now is our time for international. We have the confluence of a product portfolio, which I articulated earlier, as, as something that we didn't have even two or three years ago, that we could sell to international customers. The demand for what we have, whether it be unmanned aerial vehicles or, tactical missiles or integrated air and missile defense, is higher today in all of those segments than it was just a few years ago. And in addition to that, we have the organizational expertise that we have built, a small cadre, but a very capable group of individuals at the corporate office who are helping to build the customer relationships around the globe necessary, and the experience in each of our segments.
It's three segments, primarily, Aero, Mission, and Defense, who each have products that have now successfully been sold and deployed globally. So we're just building up the muscle to be able to do more international sales within our company. And those three things in combination, really make this the right time for our company to seize these opportunities and see our international portfolio grow as a percentage of our mix, especially if U.S. budgets stay flattish to low single-digit, because we expect international demand to be double-digit growth, and so really helping to give us a, a platform for continued growth. But I'd also say that our portfolio remains heavily weighted toward the most sophisticated capabilities that only the U.S. is buying, and our exposure to the triad is significant with B-21 Sentinel and Columbia, and we're very committed to those programs.
So this is not a shift away from domestic priorities. This is in addition to, we now have opportunity to sell some of those capabilities we've built for the U.S. to our global partners.
You do have some, sort of less exotic, like munitions.
We do.
And that is in very high demand.
Yeah
- in the current situation. You know, how do you see that growing?
Yeah.
I would expect it's also... It should be attractive margin business, too.
Very much so. That is both for the U.S., whether it's the U.S. to support our allies or directly to restockpile U.S. stocks. We are seeing that as a key contributor to growth, particularly in that case, in our defense business. There is U.S. demand for that, as well as the international demand that I talked about.
Well, let's jump over to space, because space had been the highest growth area in the DOD budget for several years, and then this 2025 budget, it's flat.
Mm-hmm.
How do you think about space, the impact of the flattening of this budget, and what it means for Northrop Grumman?
Mm-hmm. Well, the beauty of the breadth of the portfolio that I've talked about is we can pretty quickly pivot, and when I say pivot, it's not moving away from space. We've built a tremendous backlog. We have approximately doubled that business in the last five years. So as we look at what we have to execute in that business, even if top line is flat, we have a business that will continue to support development of key capabilities that we are on contract to do, and eventually transition those into production, and we still see growth ahead. But as budgets are flattening, we do expect the growth in our space business to be depressed for this period of time, and we reflected that in our discussion in the first quarter call about our expectations for space growth.
That's where the other opportunities that we just talked about and the increase there that we see in international, in armaments, in integrated air and missile defense, will become the stronger growers in the portfolio, and Aero returning to growth. So the diversification in our portfolio means that the enterprise level, our outlook, has not changed in terms of being able to grow the business. This year, we're projecting the mid-single-digit growth once again. It's just where that growth is coming from, will change as U.S. government spending profiles change.
But in space, you've got a very large backlog, so you've got a lot of visibility into where that's headed. You did have that one program canceled.
Mm-hmm.
I mean, what kind of a growth rate are you thinking about over the next few years?
Mm.
Is this mid-single digit, or can it be higher, given all of the history of growth and backlog?
Yeah, with U.S. budgets being flat and not really a strong international growth market-
Mm
For space, I don't expect space to be a strong contributor to our company growth rate. I actually-
Mm
see it being below the company average as we are projecting this year. And so how long that persists is more a question of what happens with the U.S. top line over the next several years. But with what we see in the 2025 budget, we are not anticipating that space will be a grower for us.
... One of the important areas in there is our SDA awards, mm-hmm, in sort of next generation proliferated constellations. Can you talk about how you're participating in that?
Mm-hmm.
And, you've made basically how this works, 'cause you've got-
Mm-hmm
... these different tranches.
Mm-hmm.
Some you're in, some you're not.
Mm-hmm.
How you make those decisions?
Mm-hmm. Just like any other set of opportunities, we make the decisions based on our core capabilities and how they align with the requirements, and whether we are well suited to execute the program. The competitive landscape, whether we're well suited to win the program, and the financial structure of the program, and whether it's attractive to get a good return on investment. And we look at all three of those things to decide which are the most attractive of the tranches to bid. I think the only thing that's really different here is the speed at which the government is moving to release these tranches in increments that allow industry to bid on a set of capabilities and quantities over time, and have entry points, rather than doing it all at once, which has been the more traditional government approach, winner take all for five or ten years.
This means that every eighteen months or so, there's a new set of requirements and quantities that you can make those decisions and decide whether to go forward. I'm really pleased with our team. We've been disciplined, but we've also been very successful in what we've bid, being able to bring those to closure through negotiation, get on contract, and successfully execute. And so we're very comfortable with this model, but we also remain very comfortable with the model of, you know, a contract that is structured with a single winner, and going and executing. I think we're showing our agility, as we just talked about, from a budget perspective with the portfolio, moving to where the growth is. We're doing the same in contracting structures, as contracting structures evolve, showing our agility to compete and win within them.
Well, one of the things that's happened in that space, you know, the customer has tried to open this up to, like, new entrants.
Mm-hmm.
We've seen a number, whether they're York and SpaceX in there. We've seen it elsewhere, too-
Mm-hmm
... like CCA. Can you comment on the competitive environment when you look at yourselves-
Mm-hmm
... your traditional peers-
Mm-hmm
... and then some of these new entrants?
Mm-hmm.
We saw the Anduril situation.
Right. You know, our company is not at all afraid of competition, so we embrace it. We find ourselves competing against a wide variety of competitors in different segments of our market, and successfully doing so. We're not gonna win them all. They're not gonna win them all. So the ecosystem is the size that it is to support the amount of demand that there is at any given time. I see SDA, the Space Development Agency, approach to contracting as opening up to other players. But when you look at how much any one company is getting, the large companies, the traditionals, are still getting more of that market share, ourselves included, because we have the capacity to execute across a broader part of the market, and the government needs that.
They wouldn't have the capacity they need to execute on their mission if we weren't in the mix. But there is room for other players, especially in parts of the market that are growing rapidly, and I think you are seeing that in unmanned and new entrants, seeing that opportunity coming into the market. It'll rationalize over time. Our focus is making sure we're still delivering good value to the government so that they want to pick us, and we're sharper when there is competition and good competition, really capable companies coming into the marketplace. So I see that happening. To me, it's really no different than I've seen over the decades I've been in this industry, whether you look back... You know, now it's happening in unmanned. Five years ago, it was a lot of new entrants in space.
15 years ago, it was a lot of new entrants in cybersecurity and intelligence. This happens in this industry, and some players have the ability to stick with it and grow. Many don't. In terms of new entrants, I'll let all of you, as investors, decide who's gonna be the winners and losers. We just focus on staying competitive, and we've been able to do that across all those market segments over a long period of time, and I don't think it's any different as we sit here today.
And then one other thing in space: Where does the HALO program stand?
Mm.
That's been a challenging one.
It has. We continue to work with NASA as they look at the Artemis program overall, and the requirements associated with that program and the timelines, to understand how to structure HALO to be successful in meeting their requirements for the Gateway segment of that program. We are still in active discussions with them, but really encouraged that we're coming together and figuring out how to make this program what it needs to be to deliver on the Artemis mission, but also have a fair structure and ability for us to deliver, not just for NASA, but for our shareholders.
Now, when you first became CEO, I remember our discussion about your objective to build a missiles business-
Mm
... here. I have to confess, I was a little skeptical there would still be that demand five years later-
Mm-hmm
... but, now missiles are hotter than ever. So can you comment on the missiles business?... where you see that headed, both for Northrop Grumman, both domestically and internationally?
Yep. I remember that conversation, and not to rub it in, but I said, "Just give it some time," right? We had bought Orbital ATK, and we had added to our space portfolio and our missiles portfolio, and clearly, space was in its moment at the time, and we saw that part of the synergy from our acquisition return on the investment immediately. And with missiles, it was a more gradual timeline, but really excited to have that capability in the portfolio today. We have been able to link together capability we had, resident Mission Systems that we integrated through the Orbital ATK acquisition, and even capabilities and structures that we have in AF to really step up now as a missile prime in selective situations.
We are still a trusted supplier to the missile primes as well, and we wanna keep that balance and keep those strong relationships intact. We see that business really in its moment now, but in the early innings of what we expect to be a growth segment of the market through this decade.
Are there specific programs you would point to?
Sure, you know-
Including for export.
Yeah. I, I think probably the best single program to point to is AARGM. It was a program that Orbital ATK was executing as a prime, but a fairly limited set of capabilities and platforms that AARGM could support it. It's a tactical air-to-ground missile, primarily for the fighter market, and we have now been able to extend the range on that missile, so AARGM-ER is the offering, get it qualified on additional platforms, and make it a weapon of choice for not only the F-18, which AARGM was originally designed for, but now the F-35, and the baseline for our Stand-in Attack Weapon, a new missile, but a derivative off of that product line that we won for the U.S. Air Force. And in that case, we are the prime.
There are many others where we are a trusted supplier, as I said, and keeping that balance is important to us over time. But AARGM-ER is an example of where we did step up to lead because we had a product line already in place to build off of, and it will follow the export opportunities that the platforms that carry it have. So the F-35, obviously, significant international opportunity for AARGM-ER to those F-35 buying nations.
And then, in this business area, I mean, on rocket motors, you, you've talked about your role there, but have you, have you been able to gain share? Do you think there's an opportunity to continue to do that?
I believe we have gained share because we made the investments that were needed in capacity, and we also continued to execute very well. That team is high performing, and so being able to do that meant we were able to fill demand when others couldn't, and as a result, take share.
Now, if we jump over to Mission Systems, you're getting sort of mid-single-digit growth there, but margins have been a little soft.
Mm-hmm.
I mean, can this move back to becoming a 15% margin business?
We believe it can. That business has two dynamics. You know, one, that every business has experienced and talked about, which is the macroeconomic pressures of inflation, both in labor and in supply chain materials, and that is flowing through their business as it has in others. There, you know, we have contracts that tend to be more in the 36-month range, and so you're still seeing some of that flow through. The other is they are growing in volume pretty significantly, even more than the top line indicates, because you get price improvement in microelectronics, but you have, therefore, more volume to drive the top-line growth than to offset that price differential. So they're looking at 20% types of increases in volume, and as they have done that, we are working through the productivity and the learning that's necessary to support that.
and so that's what's happening this year, and we've talked about that creating some headwinds for margin rate in the business. But once we get through that, and I, I fully believe that we will, both of those are more temporal issues, and as the business moves more toward fixed price production, 'cause it's been at a peak on its historical cost plus mix, we should see those margins work back toward 15%.
Now, that's a business that you told me that it's really a center for some of your technology advantages. Can you comment on-
Mm-hmm
... what you're leveraging out of there?
Right. So our differentiation in this industry is largely our technology leadership. We prime and bring the capabilities of our company to bear to win those jobs, but often we are a supplier, and what we're really bringing is technology differentiation. And at its core, that comes down to a handful of technology areas, one of which is our expertise in microelectronics. And I've outlined recently how many product innovations we are contributing to out of our mission systems business, whether it's advanced payloads for our space portfolio or advanced mission systems for not only our assets like the B-21, but for the F-35 in the modernization program. These advancements in capability, really, at their core, supported by that expertise we have in microelectronics and progressing the state of the art in that area forward.
We have two foundries in the company that we operate, where we can do that very advanced development in computing and bring new products to bear. We also have the expertise in the integration, the packaging. So it's not just about producing chips, it's about how knowing how to incorporate that technology into the end mission system capability. That team is really a treasure, not only for the top line and margins it generates, but for how then it contributes to the other parts of our business and to other companies who rely on it for their platforms as well.
Now, on advanced technologies, one of the things you've commented on in the past is related to NGAD and the fact that, you didn't have interest in competing on the primary platform for that. Obviously, there's a lot more on NGAD than just that. But, I guess, could you comment on that, but then also on how you think about making decisions in terms of which contracts to compete on, given, you know, you've had kind of a bad experience on the original B-21 contract? You know, what makes sense for you, and when do you pull back?
For every opportunity, we look at three things, really. One, is the contract structured in a way that we think we can get a fair and reasonable return on our investment? Two, do we have the capability to successfully execute the program and deliver on our commitments? And three, what's the competitive environment? How are our competitors gonna behave, and then how does that translate into our probability of win? And so I'm not gonna comment on any particular deal, but we did determine, in looking at all of those factors, not to bid on the Air Force next generation fighter program. And it was a combination of those three things, just as it is every time. You know, my takeaway for investors is, we are gonna remain disciplined.
My takeaway for customers is, we're gonna work with you so you have transparency into that thinking and process, and know how to engage industry and create competition, and get to fair and reasonable outcomes for all involved. And sometimes that's gonna work out that we choose to bid, sometimes it's not. That's okay. You know, we are a key supplier to the U.S. government and our allies across a number of product lines. We will be there for them, and we will continue to, you know, make it clear what the environment needs to look like for us to bid, but more importantly, to execute successfully in partnership with them.
Now, if I pull all of this together and look at cash, and think about first investment, you're guiding to $1.8 billion in-
Mm-hmm.
CapEx this year.
Yeah.
It's kind of pretty flat. Now, how do you think about CapEx trajectory going forward?
We have been in a robust growth environment for the company. We've seen the opportunities that I've talked about. We've been increasing capacity to support that and support key programs like Sentinel and B-21, and a host of others. Yet, that profile is not as demanding as we look beyond 2025. So, as a result, we are not going to be spending capital at the same rate that we have been. We've talked about that coming down, normalizing more toward a 3% of sales. Now, keep in mind, sales are growing, so we look at it more on a percent of sales basis than we do a flat number. We reserve the right to make good investments when they present themselves.
If the opportunity presents itself because the U.S. top line all of a sudden takes off and is growing more rapidly, you know, clearly we're gonna invest in our business to support that growth and ensure that those dollars are put to work in a good way. But with what we see today, we expect that our CapEx spending will begin to come down to that more normalized rate, and we've talked about our capital deployment plans remaining fairly consistent. You know, our philosophy around capital deployment has always been, first, invest in the business when we see good opportunities to make returns over the long run. But we also are committed to paying a competitive dividend and to doing share repurchase with excess cash, and we stay committed to doing that.
We anticipate that the dividend and share repurchase opportunities will increase over time as that CapEx comes down.
Can you give us a sense on, so what you're looking at in of free cash flow growth?
Yep. Yeah, so we have talked about some free cash flow growth plans. This year, the midpoint of our guide is a 17% growth. This is due to a number of factors that we've articulated, and since we're running short on time, I won't walk through each of the major components. But just know that at its core is related to the growth of the business that I've been talking about for the last 45 minutes, and its ability to have sustaining, growing margins that yield good operating cash. And then some headwinds that we've experienced in R&D tax and pensions that'll dissipate, and we will therefore be in a position to have free cash flow growth on an annual basis, you know, in the double-digit range, than we do top line and earnings growth.
So for us, headwinds that we've experienced are dissipating over this period of time, and the strong business performance will show through to, really, we believe free cash flow growth objectives.
Just to wrap up, when you look at the next year to two years-
Mm-hmm.
- where are you gonna be personally focused here?
Mm-hmm.
What are the performance challenges-
Yeah
... you're gonna be looking at?
Well, I'm excited about the prospects for our business, both to continue to grow and add new responsibilities to our team's commitments for U.S. and allied customers, but also, we will be very focused on performing on the programs that we have already been entrusted with. We have some of the U.S.'s most important capabilities under development right now, and we are going to see those through successfully. And that's where a majority of my time will be focused, while we also continue to position the business for the long term and make good choices on how we're spending our R&D and CapEx to fuel future growth into the thirties.
Great. Well, Kathy, thank you very much for being here. It's been,
Thanks, Ted
... it's been a pleasure.